What is an EDGE in trading?

We always rely on research when making trading decisions. The research has indictated that volume has little to do with price. However, strong up days combined with high volume-- specifically largest up day in 10 days combined with largest volume the returns over the next day were up .25%, next week up .60% and next month up 1.45%. This was the only edge the research discovered in using volume

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I often here and see statements like this.
What is an edge?
Is it seen as better than 50% success rate.(You dont need + 50% to profit).

My own definition is Longterm Income > Longterm expenditure.
How you derive/achieve that is entirely up to the individual.
I believe this applies to any Wealth Creation Endeavor (Business/Property/Trading).

Re: What is an EDGE in trading.

My definition of an edge is a defined "mathematical or statistical advantage", however obtained.

I suppose an ancillary question is "an edge over what?". What is the benchmark? The index? Break-even? The average crappy mutual fund?

<pedantic>BTW it's "hear"</pedantic>

Re: What is an EDGE in trading.

wayneL said:

My definition of an edge is a defined "mathematical or statistical advantage", however obtained.

I suppose an ancillary question is "an edge over what?". What is the benchmark? The index? Break-even? The average crappy mutual fund?

<pedantic>BTW it's "hear"</pedantic>

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Excellent
Encompasses more.

<pedantic>BTW it's "hear"</pedantic>

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yeh sory!!!

Hi,

I am in the business of selling Secondhand Goods !!!!

Each day I go to the marketplace where I sell my goods to the retail public
Each day I look to buy more goods at wholesale prices, to later re-sell to the public.

I specialize in selling particular products that, over the years, I have found to be readily saleable, and sometimes easily procurable on the wholesale market.
Some of my inventory I place considerable mark-up on when I think there may be buyers willing to pay considerably more than I did, this usually means I must keep the items for some time in order to achieve my desired price.

Other items, however, I have only small mark-ups and I attempt to turn these items over quickly.

My EDGE, if I possess one, is my ability to recognize a saleable item amongst a myriad of goods available to re-sell.

If you would like to purchase any or all of my goods for sale,

My business sells Equities, Futures and occasionally Currencies.

I occupy a small stall in one corner of the ASX market, and also have another business outlet located at the CBOT (business hrs are inconsistent due to my sometimes uncontrolled need for sleep)

Cheers, M

What is an EDGE in trading?

Being or getting in the 'know'... eg bludy Insider trading!

But as they say, don't get mad, get even.

That's why I'm focusing more on the psychology of the market in general and individual directors, politicans etc who have the power to move the markets.

A lot can be learned about a person by their history, appearance, gestures, language and grammar etc without actually meeting them.

My idea of what a good edge is,

Buy below theoretical value, sell above, dynamic hedge, all on zero commission.

It would be a nice gig if you can get it.

An edge is some type of advantage over other players.

For small traders, typical of many here, a clear edge is small trading size (on stocks). These people are able to enter and exit positions with relatively little slippage.

A large trader for some type of fund will have to work a position to either enter or exit a trade, thus having greater slippage.

brty

Your edge is what you use to your advantage in the market to make money.
So an edge can be a trading idea, a trading system, the fundamentals of a company or insider information (don't break the law!!).

So to be technical about it, an edge is the statistical outcome of a given payout.

For example, if you were a technical analyst, you would see a chart and say to yourself for your edge, "Price is sitting at a major support area, RSI is oversold, price is touching the 200 moving average, the other stocks in the sector is already moving up, there is bearish divergence in my other indicators. So the chance of price moving up from here is pretty high. So buy now."

So basically what you would rate your chance of buying/selling in the right direction.

you have an edge in trading if you make money consistently

An Edge is completing this 55 second commsec course.

Mistagear said:

Hi,

I am in the business of selling Secondhand Goods !!!!

Each day I go to the marketplace where I sell my goods to the retail public
Each day I look to buy more goods at wholesale prices, to later re-sell to the public.

I specialize in selling particular products that, over the years, I have found to be readily saleable, and sometimes easily procurable on the wholesale market.
Some of my inventory I place considerable mark-up on when I think there may be buyers willing to pay considerably more than I did, this usually means I must keep the items for some time in order to achieve my desired price.

Other items, however, I have only small mark-ups and I attempt to turn these items over quickly.

My EDGE, if I possess one, is my ability to recognize a saleable item amongst a myriad of goods available to re-sell.

If you would like to purchase any or all of my goods for sale,

My business sells Equities, Futures and occasionally Currencies.

I occupy a small stall in one corner of the ASX market, and also have another business outlet located at the CBOT (business hrs are inconsistent due to my sometimes uncontrolled need for sleep)

Cheers, M

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Brilliantly put, Mista

... and if you manage to sell your marked-up goods to a stall holder near you, because he reckons he's got to "average down", then you certainly have the edge over him :bekloppt:

edho11 said:

Your edge is what you use to your advantage in the market to make money.
So an edge can be a trading idea, a trading system, the fundamentals of a company or insider information (don't break the law!!).

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So the above is what an edge can be.

How about in trading it is the practical application of a theory that over-time increases an account equity.

tech/a said:

I often here and see statements like this.
What is an edge?
Is it seen as better than 50% success rate.(You dont need + 50% to profit).

My own definition is Longterm Income > Longterm expenditure.
How you derive/achieve that is entirely up to the individual.
I believe this applies to any Wealth Creation Endeavor (Business/Property/Trading).

Click to expand...

An edge is having more money than the other guy

An edge is to know that there are Known knowns, there are Known Unknowns, Unknown Knowns, and possibly Unknown Unknowns... and then just go ahead anyway [got to love that Rumsfeld].

---
Seriously though, I agree with you.

What is investing but an endeavour where you put money and effort out hoping that it will return enough to compensate your time, efforts and opportunity costs.

So an edge is whatever it is that can, over the long term, consistently, reasonably give you that.

And in trading stocks, it's brilliant to be able, on average, to buy something lower and selling it higher... if an investor can do that, it doesn't really matter what method or tools or approach is used, it works and he know what he's doing.

For people like me though, I don't use Chartings or Technical Analysis because I know I will never gain an edge and know enough about the factors and the people with whom I'll be trading with for me to make reasonably dependable profits from these charts.

That if, say, I know that based on this and that factor, these and that group of people will pay $5.50 for asset A... and if i can buy it at much lower than $5.50, i'll buy it and flick it over for $5.50 and make a profit. I wouldn't care if A is a thing worth $5.50 or 50cents... I wouldn't even care if it's a thing at all.

Since I won't be able to predict what others will pay for A or B or C... I'll play it safe and try to value what A and B and C will be worth, economically... and just to be a bit safer, I'll only buy it at below that value... and to make me sleep better, I'll require enough room below my valuation so that if I need to get out, i can get out and still leave something behind for the next guy.

Yes, I read all these from Graham and Buffett etc. but it's what a business person ought to do, in any business I think. That you have to assume your customers are also smart, that they know if what they're paying for will add value to them... that for your business to be around a while, you can't just profit yourself and not profit your customers...

And there is no way, at least for me, to know how much value my sales add if I do not know the value of what i'm selling.

In the stock market, traders get a better shot because the market is bigger, with new customers always coming through, and they do make mistakes sometimes. But that game is only for very very smart people with a lot of resources and some luck.

An edge is simply whatever gives you an advantage over your competitors in the market that allows you to win trades better than 50% of the time. If its less than this, then to me, the edge must be only in the money management.

CanOz said:

An edge is simply whatever gives you an advantage over your competitors in the market that allows you to win trades better than 50% of the time. If its less than this, then to me, the edge must be only in the money management.

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I run a system that has net positive expectancy, but a winning trade percentage of just under 40%... does this classify as money management? It's only that the winning trades make, on average, 2x more than the system's losing trades lose. It only needs to make 1.5x in order to make the system profitable... AKA... giving me an edge.

John Swift said:

I run a system that has net positive expectancy, but a winning trade percentage of just under 40%... does this classify as money management? It's only that the winning trades make, on average, 2x more than the system's losing trades lose. It only needs to make 1.5x in order to make the system profitable... AKA... giving me an edge.

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Great question John and it could be debated all day long. To me, it is my belief is that if your system or method can make money at 1:1 R/R then it has a technical edge. If it relies on greater R/R then its a money management edge. Their must be no question it is some kind of an edge or it would not make money. But its where the edge comes from that just different.

For example, say that when my favorite index future opens i notice something that happens once in a while, is see large orders in the depth at a certain level. I take a position that has typically rewarded me greater than 50% of the time. When it does reward it rewards me on average better than 1:1. To me this has some kind of technical edge, there is something happening that results in the outcome being predictable more than 50% of the time. The money management edge can only increase the reward as its leveraged up.

Someone here mentioned one time that unless your system can make money at 1:1 there is no technical edge. Thats how i always thought of it after that, not saying my minds made up, just how i see it now. I'm sure there are a ton of people here on ASF that have a better view of this than me, i'm not much for explaining stuff like this either. Sinner or RY might be able to add some perspective.

Great topic though.

The definition is simpler than what is being described by many.

The 'edge' is simply the profit (or loss) expressed as a percentage of your risk.

At a pokie machine, your edge is probably around -10%. Meaning for all the dollars you turnover, you're expectation* is to have lost 10% of that turnover. You play $1 a spin for 1,000 spins and your expected loss is $100 for the evening. That's 10%. For every dollar you risk (play), you expect to lose $0.10 cents.

In a shop:
In a month, You sell $12k of stock that you bought wholesale for $7k. You spend $3k on running your business . You risked $10k (if you made no sales, you lost $10k). You make $2k profit for every $10k of risk (costs). That's 20% edge. For every $1 you risk, you make $0.20 cents.



Calc your trading system like this:
(Average win % * Average $ per win) - Average losing % * Average $ per loss).

You have $100,000
You risk $1,000 per trade.

45% of your trades are profitable
55% of your trades are losers.

When you win, you win on average $1,500
When you lose, you lose on average $750 (because you usually get stopped out well before your $1,000 risk is hit - though sometimes it might be more, because of a gap. Here the average is $750)

(0.45 * $1,500) - (0.55 * $750) = $262.50

Expressed as a percentage, your edge is $262.50 / $750 (your average loss) = 35%
i.e. For every dollar you risk in the market (with this method), your edge / expectancy is $0.35



The edge, as CanOz suggests, is a function of win% and average $ wins vs. average $ losses. It's the combination of those 2 things that calculate your expectancy. Everyone has an expectancy, whether it's negative (a losing trader or the pokie machines example) or positive. People refer to it as your 'edge' when they mean positive expectancy. So we say the casino has the 'edge' because they have the positive expectancy. But you, the player, has an expectancy too...a negative one (so most people don't call that your edge). So, I disagree with CanOz that it has anything to do with money management.



* Final note (from the asterisk above): Note that we say 'expectation'. As we know, the real world swings could be better or worse than what we calc as our edge / expectancy. (i.e. standard deviation). Basically, someone making thousands of trades can be more confident their results will more closely approximate their expectancy than someone who made 50 trades. Basically.

CanOz said:

Someone here mentioned one time that unless your system can make money at 1:1 there is no technical edge. Thats how i always thought of it after that, not saying my minds made up, just how i see it now. I'm sure there are a ton of people here on ASF that have a better view of this than me, i'm not much for explaining stuff like this either. Sinner or RY might be able to add some perspective.

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In the broadest term an edge is simply an advantage/superiority over the opposition. I don't have any issues if people like to think the following as an edge:

1. Using a super fast connection.
2. Wearing adult diapers so you don't need to take toliet break.
3. Waking up earlier than everyone else and place orders nearer to the front of the queues.

Obviously, some edges are more valuable than others...

I am trying to come up with an example of a technical edge that operates <50% win rate... perhaps something like buying puts in attempt to pick tops? You will pay small premiums many time but a crash will deliver leveraged payout.

A "technical edge" above 1:1 is by no means a necessity in terms of overall profitability. Although it is really just semantics more than anything.

skc said:

2. Wearing adult diapers so you don't need to take toliet break.

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Ahhh SKC - while your wearing those adult diapers, I'm using a chair with a hole in it.

Obviously, some edges are more valuable than others...

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skc said:

In the broadest term an edge is simply an advantage/superiority over the opposition. I don't have any issues if people like to think the following as an edge:

1. Using a super fast connection.
2. Wearing adult diapers so you don't need to take toliet break.
3. Waking up earlier than everyone else and place orders nearer to the front of the queues.

Obviously, some edges are more valuable than others...

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I don't know - I reckon no edge (where it really matters) and they're still stuffed.

Where as some Muppet getting up at lunch time and free balling it at their old hack computer can win at this game if they have an edge.

Despite the inter-changeability that people use between positive expectancy and edge there is a big difference. Expectancy is the outcome, edge is the cause.

Problem with of only knowing your edge in the form of outcome is faith during a drawdown.

The cause of all positive expectancies (ie the edge) is .<<,,h52lnlk6hp896y(&#%@%$)@(